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Balloon Loan

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Definition: A loan that requires a single, usually final, payment that is much greater than the payment preceding it .

Though balloon loans are usually written under--and called by--another name, you can identify them by the fact that the full amount of the loan is turned over when the contract is signed, but only the interest is paid off during the life of the loan, with a "balloon" payment of the principal due on the final day. Occasionally, a lender will offer a loan in which both interest and principal are paid with a single "balloon" payment. Balloon loans are usually reserved for situations when a business has to wait until a specific date before receiving payment from a client for its product or services. In all other ways, balloon loans are the same as installment loans.